ConnectOne Bancorp, Inc.

Thank you and welcome to the Connect One Bancorp Inc. Third Quarter 2025 Earnings Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Sia Vonsia, our Chief Brand and Innovation Officer. Ma'am, please go ahead.

Good morning and welcome to today's conference call to review Connect One's results for the third quarter of 2025 and to update you on recent developments. On today's conference call will be Frank Sorrentino, Chairman and Chief Executive Officer, and Bill Burns, Senior Executive Vice President and Chief Financial Officer. I'd also like to caution you that we may make forward-looking statements during today's conference call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings. The forward-looking statements included in this conference call are only made as of the date of this call. The company is not obligated to publicly update or revise them. In addition, certain terms used in this call are non-GAAP financial measures, reconciliations of which are provided in the company's earnings release and accompanying tables or schedules, which have been filed today on Form 8K with the SEC and may also be accessed through the company's website. I will now turn the call over to Frank Sorrentino. Frank, please go ahead.

Thank you, Cian. Good morning, everyone. We used to report that during the third quarter, we continued to build upon our strategic objectives. Clear reflection, our team's focus, client dedication, and discipline. As a result, the integration of our mergers complete credit quality remains solid, and our margin continues to expand, all while organically growing our balance sheet. And so our systems merger, as we just talked about, systems merger integration, which took place only two weeks after the legal close, went exceptionally well, driven by outstanding collaboration across our team. In our first full quarter post-merger, we're operating seamlessly. One organization, consolidated systems, strong cultural alignment, unified client-first mindset. We have since built meaningful momentum across our markets, leading to accelerating performance metrics, seeing strong engagement, ongoing new client onboarding, healthy growth, loans, and deposits. This progress is especially evident on Long Island, where we're leveraging our strategy to drive growth and strengthen our position. An attractive market we entered several years ago, the merger has accelerated our goal. Importantly, the positive financial aspects of the transaction are beginning to take hold. And Bill will discuss a little bit more about that a little more in a minute. Operationally, ConnectOne's ability to attract and retain deposits remains a strength. During the third quarter, our core deposits continued to grow across both established and newly acquired client relationships. Loan originations this quarter remained healthy with over $465 million in new funding. Our team is energized to leverage our expertise and attract growth opportunities across our expansion. Looking ahead, we're well positioned for the balance of 2025 and into 2026 with a healthy and diversified pipeline for our CNI, CRA, construction, SBA lending, demonstrating the strength and the reach of our franchise. Credit remains strong, supported by prudent and consistent underwriting standards, portfolio oversight. Our non-performing assets were just 0.28% at the end of the quarter. Annualized net charge-offs remained below 0.20%. And 30-day delinquencies were just 0.08% of total loans. Additionally, Connect One's capital and tangible book value grew meaningfully. Overall, our third quarter operating performance clearly demonstrates the strength and the potential of this organization. And with that overview, I'll turn it over to Bill to walk through some of the performance.

All right. Thank you, Frank. Good morning to everyone on the call. It was a great quarter, and our outlook remains very positive with strong performance anticipated across all of our operations. As Frank mentioned, the merger, which was finalized five months ago on June 1st, now fully integrated. And that was due to a swift, seamless brand and back office systems conversion completed within the very first month. That rapid integration has allowed performance metrics to excel with an acceleration of improvements expected in the fourth quarter and into 2026. Operating performance metrics already show significant year-over-year improvement. In the current quarter, operating return on assets increased by over 30 basis points to 1.05%, while PPNR as a percentage of assets rose by approximately 50 basis points over the past year to 1.61%. Our earnings performance is being driven by the merger and a widening net interest margin, which grew to 311 from 306 in the sequential quarter and from 267 a year ago. And the spot margin at quarter end was already higher than 320. Expect a fourth quarter margin at 325 or even above. Now, the current quarter's margin at 311 reflected two temporary factors. One was the 75 million of high rates coordinated debt that was outstanding but redeemed on September 15th. We also had higher than typical average cash balances due to the large deposit growth that we've had, which exceeded 600 million. We anticipate average cash balances to be below 400 million in quarter four as that cash rotates into loan funding. So without those two items, which worked to compress the reported margin, the third quarter NIM would have been in excess of 350. In terms of the balance sheet, we continue to observe robust growth following exceptional organic growth in the second quarter. On a sequential basis, our client deposit growth was approximately 4% annualized, and that was building on the second quarter's annualized growth of 17%. Annualized sequential loan growth of the quarter matched deposit growth, and that maintained our loan-to-deposit ratio below 100%. Now, the loan pipeline is strong, and we expect loan growth to accelerate in the fourth quarter. Average loans increasing by more than 2%, not annualized, 2% from quarter to quarter versus the sequential third quarter. And please keep in mind for your model that average cash is likely to decrease, and that will slow the increase in total interest earning assets. In 2026, we could easily see loan growth in the 5% plus range. That'll be dependent, of course, on the economy and loan demand. Now, adding to the strong performance of Connect One this quarter were two non-recurring items that boosted pre-tax income by more than $10 million. Let me explain those to you. First was a $6.6 million of cash received this quarter, the employee retention tax credit that was conceived during the pandemic. Now, initially, it was for companies with less than 100 employees, and that was for the years 2019 and 20. That employee threshold was raised for 2021 to include businesses with up to 500 employees. That allowed Connect One to qualify. At the time, Connect One had 450 employees, reflecting our efficient operating model given our asset size. Now today, our staff size has grown to about 750 employees due to organic growth and acquisitions, yet we remain a peer-leading, efficient organization, about $19 million in assets per employee. Now the second one-time benefit recognized during the quarter, the $3.5 million pension curtailment gain relating freezing of First of Long Island's pension plan effective September 30th, with the shifting of those benefit values to our 401 match program. The realignment of the benefit plans will result in merger net cost savings of $1 million annually, and that's in addition to this one-time $3.5 million present value benefit recorded this quarter. Now, in terms of non-interest income, very, very strong quarter because of those non-recurring items that exceeded $19 million. Recurring level non-interest income right now remains at about $7 million per quarter. We expect growth, especially in gains on sales. We continue to build out SBA, both by and residential mortgage. We expect SBA to add significantly to our non-interest income in 2026. Keep in mind, with the government shutdown, we could see a backlog building in the fourth quarter, and that will be made up after the government reopens. Operating expenses, net of merger and restructuring charges were 55.8 million, and our recurring run rate guidance remains approximately 55 to 56 for the fourth quarter, and 56 to 57 million per quarter during the first half of 26. And the latter part of 26 could drift just slightly higher. I'll keep you updated on our targets as we move forward. These amounts reflect normal expense growth, net of additional merger savings, which have not yet been fully realized. Turning to taxes, Our tax expense line for the full year has been a little tricky. That reflected the merger, and we had a second quarter surge related to intercompany dividends. I also want to mention that our actual marginal tax rate has trended upwards. Our growth and geographic reach have impacted our traditional tax strategies. Now for 26, we plan to utilize new strategies. Those are expected to result in an effective tax rate in the range of 28%, maybe a little higher, maybe less. Let me turn now to credit. As Frank mentioned, I'm going to repeat some of these numbers. Credit quality remains sound by all measures. Non-performing asset ratio is at historical lows at 0.28%. Car drops for the quarter were just 18 basis points. Delinquencies more than 30 days were only 0.08% of total lows, very, very low in terms of low interest rates. The CRE concentration ratio continued its downward trend, falling to 434 at September 30th. Our capital ratios continue to strengthen. Holding companies' tangible common equity ratio rose pretty significantly to 8.4%. And while our goal is to reach 9%, there's no immediate need to achieve this. Additionally, tangible book value growth has resumed its upward trend to 5% increase we've calculated in tangible book value per share since the merger's completion. And with a higher level projected retained earnings, we expect to have enough room in 26 for for a common dividend increase and opportunistic share repurchase. That's it for my introductory remarks, and back to you, Frank.

Okay, thank you, Bill. Simply put, we've built a premier commercial bank with the scale and talent to serve the largest and one of the best markets in the country. Connect One's franchise value is in its strongest position ever, driven by accelerating financial performance, prudent organic growth opportunities, a strong technological focus, and solid credit quality. Based on where our stock is trading today, we believe there's never been a more compelling time to invest in ConnectOne. As always, we appreciate your interest in ConnectOne Bancorp. Thanks again for joining us today. And with that, I'd like to turn it over for your questions. Operator?

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, can you press star followed by the number one on your telephone? and you will hear a prompt that your hand has been raised. Should you wish to withdraw, please press star followed by the number one again. If you're using a speakerphone, please leave the handset before pressing any keys. One moment, please, for your first question. Our first question comes from the line of Daniel Tamayo from Raymond James. Sir, please go ahead.

Hey, thank you. Good morning, Frank. Good morning, Bill. Maybe starting on your profitability target, I think last quarter you talked about, Frank, hoping to hit 1.2 ROA and 15% ROTCE in 2026. I'm just interested in your current thoughts around profitability targets for next year.

I think those targets are in line, still in line with what we said before. Easily see 120 by the second quarter and My model, at least, is showing us getting close to 130 by the end.

Okay, great. Thanks for that. And then follow-up, kind of unrelated, but we saw yesterday the announced end of quantitative tightening. I'm just curious, maybe you guys' thoughts on how that could impact deposit growth and or pricing in your markets.

Well, I think it will bode well for us going forward. Certainly, it appears the Fed believes the economy is going to continue to be somewhat robust and that more liquidity is needed in the marketplace. And that liquidity generally turns into deposits of banks. So I think across the spectrum of banks, you'll see deposits continue to grow, which I think will be good. It'll reduce some of the competitive pressures out there. I think everyone has seen over the last quarter or two Some of the, while, you know, short-term rates have gone down, there's been increased competition for deposits. So, a steepening yield curve, more liquidity, and a robust economy that's pretty stable, I think, certainly for Connect One, bodes well. I think it bodes well for our industries.

I agree with what Frank said, and also, you know, the margin continues to expand. for the reasons we talked about before. It's still going to be, we don't know exactly how many Fed cuts at the end of next year, but there are going to be a few. And our, you know, our loans are repricing faster. Even in a downgrade environment, our loans are repricing upward. So still looking at margins. You know, I'll be bold enough to say approaching in the 340 to 350 range by the end of next year.

That's great. Yeah, let's hope all of that works out in your favor. It seems like it's trending certainly positively. So anyway, appreciate all that color, guys, and for taking my question. All right. Great. Thanks, Daniel. Thanks, Daniel.

Thank you. Our next question comes from the line of Tim Sitzer from KBW. Please go ahead.

Hey, good morning. Hope you guys are doing well. Hi, Tim.

Hey, Tim. Good morning.

So the first question I have is, now that you guys have closed merger, full quarter end, how do you guys think about the capital allocation and deployment going further? Frank, you mentioned you think your stock is a value, you know, or share repurchases on the table here, and, you know, would you just like to get some color on that?

Well, from my perspective, I know, you know, Bill made some comments relative to our bill, ability to build capital. Capital is building quite quickly at the company, as you know, from a variety of areas, including profitable growth that we have. So I do think we'll have a lot of flexibility in 2026 to make some determinations as to what we should do with that capital. Obviously, if we see higher growth rates and we're opportunistic to engage in growth at the higher end of the spectrum, That'll leave a little bit less for other opportunities, but overall, I think we can pretty much do anything we want to do in 2026. Bill, I know you had some strong thoughts about it.

Yeah, no, I agree with that. You know, our growth is going to be prudent and disciplined in terms of spreads. I'd like to see the capital ratios trend upwards, but I think I said on the call, even with all that, because of the low dividend payout ratio we have today and the high level of earnings, we'll have room So opportunistic to every person.

Okay, great. That's good to hear. And then I was also looking to get an update on Bowfly and maybe the growth outlook there, putting aside the government shutdown, the impact on SBA. It's more near, but I'd love to get an update on that. And then also maybe some color. on if the recent changes to rules governing kind of like the smaller dollar, million dollars or less loans in SBA that in terms of like underwriting and the new fees that came back in over the summer.

So we'll start with Bowfly. Bill will talk a little bit more about the specifics of the various programs, but Bowfly since since inception here at Connect One has continued its upward trend. We now represent some over 250 national franchise brands across the nation, which is an all-time high. When we purchased the company, I think they represented 60% or something like that. So this trajectory upward, and we put a lot of effort into being the predominant company that can validate franchisee applications in that space. And so that's led to this growth in that portfolio. We've really focused over the last year or so to drive the opportunities that come out of that business to our growing SBA platform. And we're really beginning to start to see from a financial perspective FRUITS OF ALL OF THAT LABOR. AND YOU WILL CONTINUE TO SEE THAT IN THE FUTURE BY THE SBA REVENUE LINE CONTINUING TO EXPAND. SO WE'RE VERY HAPPY ABOUT WHERE WE ARE. WE'RE VERY HAPPY ABOUT WHERE WE'RE HEADED WITH THAT. AND WE'RE VERY HAPPY ABOUT HOW IT'S TRANSLATING INTO QUALITY REVENUE HERE AT CONNECT ONE. BILL MAYBE WANT TO.

JUST TO REPEAT A LITTLE BIT OF WHAT YOU SAID IN THAT WE'VE SPENT THE PAST COUPLE OF YEARS REALLY BUILDING AND PERFECTING platform of life led to a significant increase in the number of franchisors to participate. And we're now starting to translate that into more income through SBA sales. So already was reflected this quarter and the increase is expected to accelerate. There's a little bit more of a time when it comes to franchise loans is a little bit more of a period that it takes from perception to gain. So the pipeline is building heavily for next year, and I'm very optimistic we'll have a lot of gain on sale there. In the meantime, we've been building our boots on the ground SBA lending. Everything is working in our favor there. So look, we started off from zero, and it's going to be a big portion of our non-interest income going forward.

Great. I appreciate all that color there. Thank you for taking the questions.

Thank you. Our next question comes from the line of Matthew Brees from Stephens, Inc. Please go ahead.

Hey, good morning. Good morning, Matt. The first one for me, you know, it's really nice to see those non-interest-bearing deposits up, I think, 3.7% quarter to quarter, and then, you know, CDs down 2.8%. just talk to us about you know what's going on a few of the wins there are the acquisition related meaning you know is the flick deal and the brand starting to bear some fruit and then looking ahead and we see deposit growth matches the loan growth for next year um you know maintaining that sub 100 promote the deposit ratio yeah we'll take i'll take your questions in reverse order so the goal would be to you know match the deposits with the uh loans and

And that actually answers the first part of your question. There's been a focus here at Connect One over the last couple of years to really redefine and make certain that the business we're in is to be a relationship bank that takes in deposits and makes loans. And we like taking in deposits from the same folks that we make loans to. So we've had an effort ongoing here through all of our lending teams really focus on making sure we're going after the types of clients that bring us substantial depository relationships. And we've been weeding out part of the, you know, part of the slowdown in the overall growth is eating out of clients who maybe promised us a depository relationships and never delivered, or just folks that wound up here with a transaction. We really don't want to be just a transaction oriented bank. So I think, you know, with that focus and that focus continues, going forward. I think actually the merger that we just completed, the group of clients that we onboarded there actually may have had the sort of a reverse issue there where they were very deposit rich and didn't take advantage of all the lending opportunities of those clients. So I think rounding out the folks that were getting in front of it on Long Island, this continued focus on high-quality relationship-type clients is really what's driving the profitable and, as Bill said, spread-dependent business that we have. And also, you know, it's allowing us to bring on high-quality-type clients that should ensure that we keep a loan-to-deposit ratio in and around the range that it

Great. And then, you know, Bill, maybe you could help me out with a couple things. What proportion of loans are now pure floating rate? And this quarter, what did you see for roll-on versus roll-off dynamics on fixed rate or adjustable rate loans? I guess where I'm going with this is, are you starting to see any spread compressions, as some of your competitors have indicated?

Well, first off, to answer your first question, it's only about 15% are pure floating. We're in good shape there. In terms of the roll-on and roll-off of fixed versus floating, I'm not sure whether how much has changed the dynamics of the balance sheet. I know you usually ask about what rates loans are going on versus coming off. You know, when you add drawdowns to it and paydowns, like in the high sixes going on, the low sixes going off.

Great. And then just two others for me. You know, first one is just on the reserve. You have a 1.35% reserve to loan ratio. Historically, Connect One has been a lot lower, maybe 1 to 105. Credit remains solid. Over some period of time, should we expect that reserve to kind of trend back to where you were, you know, as kind of flick loans reprice? It just seems high relative to the credit quality.

Yes, I think that's how it will work. Okay. It'll gravitate back towards one level or maybe a little bit higher. We'll see where the economy is and how the CECL works at the time.

Okay. All right. And then last one is just, Bill, you had mentioned elevated cash. Cash could come down next quarter. What should we be thinking of in terms of normalized cash assets? That's all I had.

Thank you. For now, I would say 350 to 400 million would be normalized. It could go lower than that, but for this quarter coming up, that's what I would say. Okay, so if you look at our loan growth on an average basis, you know, you're going to see pretty flat interest-earning assets, and that's fine by me, you know, in terms of capital ratios, in terms of margins.

All right, thank you. Before I proceed with the next question, again, should you have a question, please press star followed by the number one on your telephone keypad. Our next question comes from the line of Betty Strickland from Hovde. Sir, your line is open.

Hey, good morning. Just wanted to stick on the loan repricing opportunity piece there. Bill, can you help us quantify the amount of fixed rate loan repricing we could see over the next several quarters? Just trying to figure out the size of the opportunity there.

The opportunity is quite large. Probably have about a billion dollars repricing at 26 and another billion in 27.

And then one of the follow-ups on credit, you know, obviously good to see MPA stable, that charge-off step down a bit. Do we expect charge-offs to kind of remain in the high teens to low 20s range just in terms of basis points, so, you know, average loans or does that step down?

Just trying to get a sense for what we should expect. Yeah, I mean, it's hard to predict, but we've been pretty steady with that. So I'm running my own model. That's what I would have going forward for the next four quarters.

That's all I have.

Thanks for taking the questions.

Thank you, Fadi.

Thank you. Our last question comes from the line of Benya Tamayo from Raymond James. Sir, go ahead.

Ah, one more. Hey, guys. Yeah, just a follow-up here for me.

Sure.

So maybe first you can just remind us what your balances of rent-regulated loans are at the end of quarter, and then... To follow up to that, it's just, you know, just curious, kind of, if you could update us on your thoughts, if we do get a Mamdani win next week in the mayoral election, what that means for the whole rent-regulated kind of industry, in your opinion. Thanks.

All right. Let me start with the numbers, and I think we're positioned well. The total aggregate exposure to majority-owned rent-regulated is 700 million. Sixty percent of it are 400 million came from first of Long Island, where we have a 20% mark against it. So in my view, that's completely rank sense. Rest of it, a Connect One portfolio is about $275 million, less than 2.5% of our total loan portfolio, considerably underwritten, no value-add projects, continues to perform well, moderate, I would say not super significant stress in the portfolio. And Frank, you want to comment on what's happening?

As you can well imagine, we get this question a lot, certainly being centered in the New York metro market. And my answer has been fairly consistent. There are so many variables as to what will happen from today forward, whether he wins, he doesn't win. Let's not forget the other alternative to Mondami is Cuomo, who is the one who signed the actual 2019 rent regulation law that's causing a lot of the consternation in the portfolio anyway. So it's not like we're going from, you know, one side of the spectrum to the other. Rent regulated is here to, rent stabilized rather, is here to stay. It's a constant struggle within, you know, that marketplace relative to the expense base versus the revenue stream. You know, on the positive side of the equation, we saw this year a 3% increase that came on the back of a 27% increase the year before. It looks like for the next couple of years, we're still going to have a rent regulated board that's fairly reasonable and is taking into account inflation, other costs that are being pushed through the system. There are those who would argue that, you know, potentially a Mondami administration might actually be good for the rent regulated portfolio in that, you know, he's looking to work to reduce the expense side by, you know, reorganizing the tax basis and tax base for real estate taxes and other potential solutions to allow landlords to be able to invest in the properties to get more units back on the market. As you know, there's some 50,000 rent-stabilized units that are vacant today because of the change in the 2019 law. So there's just too many variables to put your finger on. Here's what's going to happen. All I know is this has been something that's been in existence for a very long time. It's ebbed and flowed. And for the most part, I'm pretty optimistic that one way or another, people need places to live. I think there's going to be programs put in place to make certain that that product continues to be available to residents in New York City. It will change over time. How that change occurs, hard for me to say right now. We're pretty, we're not pretty, we're very comfortable with the loans that we underwrote. We were never part of the whole value-add story to, you know, get and stabilize tenants out and replace them with market tenants. So we really don't have that risk on our balance sheet in those lending opportunities. And I think over time, it's just going to get figured out what to do with that product set. So we're comfortable with the operators that run the assets that we have. And we have very, you know, strong LTVs and debt service coverage ratios, properties that are in our portfolio. Of course, we're going to watch very, very closely what happens over time. But I do think this is a very, very slow moving process. I don't think anything's going to happen with any immediacy in the short term.

That's terrific. Thanks for the data and all the color on that. Very helpful.

Thank you. There are no further questions at this time. I would now like to turn the call over back to the management for closing remarks.

Well, I want to thank you everyone for joining us today and for some really great questions. And we look forward to speaking with everyone during our year-end and fourth quarter conference call. Everybody have a great day.

Thank you. You may now disconnect.